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The scoop on Chuck E. Cheese's going private

Apollo Global Management LLC is in the process of buying CEC Entertainment, Inc., the owner of Chuck E. Cheese's, and taking it private for $1.3 billion including the assumption of debt. This definitely means the private equity firm is buying themselves all the cheesy pizza and arcade tokens they could ever want. This is the fifth-largest ever leveraged buyout of a restaurant chain (the stock market/financial industry classifies Chuck E. Cheese's (CEC) as a part of the restaurant industry although the majority of its sales are not food and beverage).

Here's some analysis of the $1.3 billion purchase price Apollo is paying:

• It's approximately 1.6 times CEC's annual sales.
• It's eight times CEC's 2012 EBITDA.
• It's an average of $2.5 million for each CEC-owned store the end of September 2013. We estimate it's around a 25% premium over the current physical replacement cost for each store.

CEC's comparable store sales have recently been on a downward trajectory.

When we dug into the sales data further for the last 15 quarters, we found that a per company-owned store sales decline is due to declining food and beverage sales. On a same quarter to quarter and inflation-adjusted basis, F&B sales per store have declined between 7% and 11%, whereas entertainment (game room) sales have basically remained steady.

Declining per store food and beverage sales is actually a much longer trend that started back in 2005. You can read a very detailed analysis of CEC's long term decline in our June 2013 Leisure eNewsletter.

Apollo Global has extensive access to restaurant expertise, both acquired through the Carl's Jr. and Hardees chains they recently sold and their ownership of Caesar's Entertainment Corporation and Norwegian Cruise Lines. They also have experience in the family entertainment arena with their ownership of Great Wolf Lodge. Apollo is sure to bring some changes to CEC's management team that has basically been on board for 25 years.

There is a strong possibility Apollo will bring their expertise to bear especially on the food and beverage side of Chuck E. Cheese's business where the giant rodent loves entertaining on his new guitar but seems to be on a diet when it comes to eating the cheese.

Other players in the community-based children's entertainment market need to take serious notice, as Chucky is about to ramp up his game.

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